December 24 - Bloomberg (Jeremy R. Cooke): "U.S. state and local government
borrowing will drop to about $100 million during this holiday-shortened week...after
municipal-bond sales reached an all-time high during 2007... Issuance of state
and local bonds due in more than 13 months reached about $428 billion for the
year through last week, based on Thomson Financial data... The preliminary
total is 5% more than the $408 billion record set in 2005."

There were no corporate debt issues this week.

December 28 - Bloomberg (Junko Fujita): "Citigroup Inc., Bank of America Corp.
and 30 other issuers from Iceland to Australia drove yen-denominated bond sales
in Japan to a seven-year high as they took advantage of the lowest rates in
the industrialized world. Sales of samurai bonds, debt sold by overseas borrowers
mainly to Japanese investors, tripled to 2.2 trillion yen ($19.3bn) this year,
from 741 billion yen in 2006, according to data compiled by Bloomberg."

Total Commercial Paper added $1.2bn to $1.785 TN. CP is now down
$438bn over the past 20 weeks. Asset-backed CP dropped another $15.9bn
(20-wk drop of $448bn) last week to $764bn. Year-to-date, total CP
has contracted $189bn, or 9.6%, with ABCP down $307bn (29%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.251 TN y-t-d, or 26%, to $6.061 TN.

Credit Market Dislocation Watch:

December 27 - International Herald Tribune (Floyd Norris): "'The severity
of the subprime debacle may be only a prologue to the main act, a tragedy on
the grand stage in the corporate credit markets,' wrote Ted Seides, the director
of investments at Protégé Partners, a hedge fund of funds, in
Economics and Portfolio Strategy. 'Over the past decade, the exponential growth
of credit derivatives has created unprecedented amounts of financial leverage
on corporate credit,' he added. 'Similar to the growth of subprime mortgages,
the rapid rise of credit products required ideal economic conditions and disconnected
the assessors of risk from those bearing it.'"

December 27 - Bloomberg (Elizabeth Hester and Adam Haigh): "Citigroup Inc.,
JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional
$34 billion in securities linked to the collapse of the subprime mortgage market,
according to Goldman Sachs Group Inc. Citigroup, the biggest U.S. bank, may
reduce the value of its holdings by $18.7 billion in the fourth quarter and
cut its dividend 40%, Goldman analyst William Tanona said..."

December 28 - Bloomberg (Bryan Keogh and Pierre Paulden): "Citigroup Inc.,
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. are offering
discounts of as much as 10 cents on the dollar to clear a $231 billion backlog
of high-yield bonds and loans... While lenders reduced the overhang by 32%
since July, they are struggling to unload debt from this year's record $438
billion of leveraged buyouts after losses from securities linked to subprime
mortgages reduced demand for higher-yielding assets..."

December 28 - The Wall Street Journal (Gregory Zuckerman and Alistair MacDonald): "It
isn't just consumers who are having a harder time getting credit from lenders.
It's hedge funds, too. Investment banks are cutting back on loans to hedge
funds, eliminating some clients and raising borrowing fees for others... 'Banks
aren't in a position to be accommodating at the moment,' said Michael Hintze,
chief executive of CQS, a...hedge fund with $9bn under management. If the change
continues, it could put some pressure on the profits of the prime-brokerage
units of the major banks, which make big money by lending to hedge funds...
The move also could put pressure on the returns of some hedge funds, which
often rely on healthy doses of borrowed money, or leverage, to boost their
returns. 'Leverage definitely drives returns,' says David Gold, an executive
at Watson Wyatt Worldwide... In particular, Mr. Gold says quantitative funds
-- those that trade using certain computer models -- are seeing their borrowing
ability reduced... He says the move by the banks will have the biggest impact
on smaller hedge funds."

December 27 - Financial Times (Deborah Brewster): "More than 10 North American
banks and fund managers have collectively injected $3bn into their money market
and cash funds since October to stem losses. Janus, the fund manager, this
week became the latest to bail out its money market funds. It put in $109m
to buy troubled asset-backed securities from its funds. Half a dozen firms
have made similar moves. The bail-outs, in the form of guarantees, credit lines
and the buying out of troubled securities, are intended to stop funds falling
below the $1 a share promised to investors. They show how seriously the parent
companies take the reputational risk of 'breaking the buck'."

December 28 - The Wall Street Journal (Sudeep Reddy): "The Federal Reserve's
first auction of $20 billion in loans to banks under an initiative aimed at
unfreezing money markets drew 93 bidders, indicating interest from all sorts
of banks across the country. But the first details of where the money went
suggest the biggest borrowers are near Wall Street. The central bank said $16.5
billion of loans under its 'term auction facility' went to institutions in
the New York district, where many of the nation's largest banks have their
headquarters."

December 27 - Bloomberg (Cecile Gutscher and Christine Richard): "ACA Capital
Holdings Inc., the bond insurer that lost its investment-grade credit rating
last week, agreed to give control to regulators to avert bankruptcy. ACA Financial
Guaranty Corp., a unit of ACA Capital, will seek approval from the Maryland
Insurance Administration before pledging or assigning assets or paying dividends,
the...company said... S&P sliced ACA's rating 12 levels to CCC, casting
doubt on more than $75 billion of debt the company guarantees, including $69
billion of securities such as collateralized debt obligations. ACA reached
agreements to avoid posting collateral until Jan. 18 against credit derivatives
it uses to insure the debt."

December 28 - The Wall Street Journal (John Hechinger): "SLM Corp. cited potentially
grim prospects for its main federally guaranteed student-loan business, and
indicated it was accelerating its push into private loans that aren't backed
by the U.S. government. The biggest student lender...also disclosed that it
faced a federal inquiry into its billing practices for high-return loans and
a recent lawsuit from customers alleging racial discrimination. Sallie Mae
disclosed both its strategy and the actions it faced in a securities filing
yesterday detailing $2.5 billion in stock offerings. The company is using the
proceeds to pay off a soured bet on its stock price and shore up its credit
rating. Sallie Mae's stock has plunged this year after Congress slashed subsidies
to student lenders and a $25 billion takeover bid by a group of investors,
led by private-equity firm J.C. Flowers & Co., fell through."

December 27 - Bloomberg (Laura Cochrane): "Westfield Group, the world's biggest
shopping center owner, scrapped plans to sell A$700 million ($611 million)
of U.K. and New Zealand assets after failing to find buyers following the slump
in the U.S. subprime market. The sale of the remaining third of a 530 million
pound ($1.05bn) U.K. Shopping Centre Fund has been stopped, Chief Financial
Officer Peter Allen said... The Sydney-based company also canceled the sale
of two shopping centers in New Zealand..."

December 24 - Bloomberg (Sean B. Pasternak): "The market for non-bank asset-backed
commercial paper will reopen after a group of investors holding about C$33
billion ($33.3 billion) of the short-term debt struck a deal to restructure
the securities. The group, led by Toronto lawyer Purdy Crawford, agreed yesterday
to swap the commercial paper for longer-term notes, ending a four-month freeze
in trading of the securities."

December 28 - Bloomberg (Laura Cochrane): "Centro Properties Group, the owner
of U.S. malls that lost 80% of its market value last week, said two of its
funds will pay reduced dividends for the fourth quarter. The A$2.4 billion
($2.1 billion) Centro Direct Property Fund and the A$1.9 billion Centro Direct
Property Fund International will pay unit holders less than in the three months
to September because they are majority invested in other Centro managed funds,
Alan Hayden, manager of the domestic fund, said..."

December 28 - Bloomberg (Stuart Kelly): "Rams Home Loans Group Ltd., the Australian
mortgage company that failed to refinance more than A$6 billion ($5.3 billion)
in short-term loans this year, today extended the maturity of two of its funding
facilities. Rams extended a A$500 million loan to May 2 from Dec. 31, the Sydney-based
non-bank lender said in a statement to the Australian stock exchange. A separate
A$250 million facility was extended to Jan. 31 from Dec. 31, Rams said."

Currency Watch:

December 28 - Bloomberg (Christopher Swann and Kevin Carmichael): "The dollar's
share of global foreign-exchange reserves fell to a record low in the third
quarter as demand for U.S. assets waned after the subprime-mortgage market
collapsed. The U.S. currency accounted for 63.8% of reserves at the end of
September, down from 65% at the end of June, the International Monetary Fund
said... The share of euros increased to 26.4%, from 25.5%. The figures suggest
central banks diversified out of the dollar as it fell to the lowest level
in a decade. Investors sold a record amount of U.S. securities in August when
defaults on subprime mortgages rippled through financial markets and the Federal
Reserve signaled it would cut interest rates."

December 27 - Financial Times (Daniel Dombey): "At the end of a year in which
the dollar has endured a marked decline against other currencies, an unsettling
question is beginning to be voiced: can the troubles of the US currency be
confined to the financial world or are they set to undermine Washington's place
on the international stage? 'This is the neglected dimension of the dollar's
decline,' says Flynt Leverett, a former senior National Security Council official
under President George W. Bush. 'What has been said about the fall of the dollar
is almost all couched in economic terms. But currency politics is very, very
powerful and is part of what has made the US a hegemon for so long, like Britain
before it.' Along with some other commentators, Mr Leverett brackets the dollar's
recent fragility with related phenomena, such as the greater international
use of rival currencies... 'Americans will certainly find global hegemony a
lot more expensive if the dollar falls off its perch,' adds Kenneth Rogoff,
former chief economist of the International Monetary Fund..."

The greenback rally ended abruptly, with the dollar index suffering a 1.9%
loss this week to 76.22. Over the past five sessions, the Swedish krona increased
2.9%, the Norwegian krone 2.9%, the Swiss franc 2.7%, the South African rand
2.4%, the Danish krone 2.4%, the euro 2.3%, and the Japanese yen 1.8%. On the
downside, the Mexican peso declined 0.9%.

Commodities Watch:

December 28 - Bloomberg (Pham-Duy Nguyen): "Gold rose, heading for the biggest
annual gain since 1979, as a decline in the dollar boosts demand for the precious
metal as an alternative investment. Gold has gained 31% this year as a weaker
U.S. currency, record energy costs and continuing conflict in the Middle East
sparked demand for the metal. Investment in the StreetTracks Gold Trust, an
exchange-traded fund backed by bullion, has climbed to a record 628 metric
tons. 'Gold currently has such a strong supporting cast in the dollar, energy
prices and geopolitical tensions,' said Matt Zeman, metals trader at LaSalle
Futures Group in Chicago. 'One would be hard-pressed to find a reason for gold
not to continue to rally at this point.'"

December 28 - Bloomberg (Halia Pavliva): "Platinum, little changed, headed
for the biggest annual gain since 2003 after the slumping dollar enhanced the
appeal of the precious metal as a hedge against rising consumer prices. Palladium
rose. Platinum was up 34% this year... 'Platinum is behaving more and more
as a hedge against inflation, just like gold and silver,' said Ralph Preston,
a strategist at Heritage West Financial Inc. in San Diego. 'It will go much
higher, as the weakening dollar is continuing to support platinum.'"

December 28 - Bloomberg (William Bi): "Soybean futures in Chicago rose to
the highest in 34 years and corn reached an 11-year high as a jump in crude
oil prices may increase demand for the crops to make biofuels at a time of
reduced supplies... 'We haven't seen signs that the recent rallies are curbing
demand' for either corn or soybeans, said Sun Rui, a Beijing-based trader at
Cofco Ltd., China's largest grain trader."

December 26 - Bloomberg (William Bi): "Soybean futures in China, the world's
biggest consumer of the commodity, surged to a record as traders speculated
vegetable oil demand may outstrip supplies resulting from government efforts
to control food prices. The price of soybean oil...also rose to a record...
The government has tried to lower vegetable oil prices by selling from state
reserves and allowing soybean imports at reduced tariffs until the end of March."

December 26 - Bloomberg (Halia Pavliva): "Copper rose for a fifth straight
session, the longest rally in four months, on speculation demand will climb
in China, the world's largest consumer of the metal. China will eliminate a
2% import duty on copper cathodes and anodes next month... Copper prices have
more than doubled in the past three years as usage surged in China... China's
imports of refined copper in the 11 months ended Nov. 31 surged 89% to 1.4
million tons from a year earlier..."

December 26 - Bloomberg (Aya Takada): "Natural rubber futures in Tokyo, the
global benchmark, rose to the highest in seven weeks on expectations output
in Thailand, the world' largest producer, will start declining early next year...
Rubber for June delivery gained as much as...0.8%... The contract has gained
23% this year, heading for the third straight annual gain..."

December 27 - Bloomberg (Li Yanping): "Chinese industrial companies' profits
rose 36.7% in the first 11 months, outpacing the gain a year earlier and making
it harder for the government to tame investment and prevent economic overheating...
That's more than the almost 31% increase through November 2006. Sales jumped
27.6% to 35.5 trillion yuan."

December 27 - The Wall Street Journal (David Winning and Sherry Su): "China
unleashed a string of metal-export tax increases and import-duty cuts aimed
at shifting its economy away from energy-intensive industries. It also announced
steps intended to ease the country's worst fuel crisis in years. The moves
by the Ministry of Finance were signaled last week when the government said
600 kinds of products would carry temporary export levies in 2008, while import
tariffs on other goods would be overhauled."

December 26 - The Wall Street Journal (Kaja Whitehouse): "The latest year-to-date
performance numbers from hedge funds that invest in China's red-hot market
appear impressive... The average China-focused hedge fund is reporting a double-digit
percentage gain for the 11 months ended in November, with a few up more than
100%."

December 26 - Bloomberg (Feiwen Rong and William Bi): "Pork prices in China,
the world's biggest producer and consumer of the meat, rose for an 11th week
as demand and higher livestock farming costs thwarted government efforts to
boost supply and tame inflation... The wholesale price of pork...gained 1.4%
to 20.97 yuan ($2.86) a kilogram, up 53% in the past year..."

December 27 - Bloomberg (Chia-Peck Wong): "The value of new mortgages in Hong
Kong rose 76% from a year ago to the most since July 1997, as economic growth
and low interest rates fueled demand for loans."

Japan Watch:

December 26 - Dow Jones Newswire: "A cautious view of Japan's economy is spreading
among business leaders, with the percentage of corporate chiefs who said the
economy is expanding plunging to 64% in a recent Nikkei Inc. survey from 79%
in October, The Nikkei reported..."

December 28 - Bloomberg (Mayumi Otsuma): "Japan's inflation rose at the fastest
pace in more than nine years in November and industrial production and household
spending fell, signaling rising oil costs may derail the economy's longest
postwar expansion. Core consumer prices, which exclude fresh food, climbed
0.4% from a year earlier..."

Asian Bubble Watch:

December 24 - Bloomberg (Shamim Adam): "Singapore's inflation accelerated
in November to the highest in 25 years as consumers paid more for food and
transportation. The consumer price index jumped 4.2% from a year earlier..."

December 26 - The Wall Street Journal (Alex Frangos): "Some of the biggest
cities in the world are proposing the most ambitious real-estate projects in
a generation... The list is long and expensive, with more than 15 ventures,
some of which are expected to cost as much as $30 billion: Four in New York
City, at least three in Dubai, two in London, Chicago and Milan, and one in
Amsterdam, Los Angeles, Paris and Mumbai. Reasons for the projects vary...."

December 26 - Bloomberg (Craig Stirling): "U.K. house prices fell the most
in three years in December, and the threat of more declines may cause the property
market to seize up in 2008, Hometrack Ltd. said. The average cost of a home
in England and Wales slipped for a third month, dropping 0.3% to 175,200 pounds
($348,350)..."

December 27 - Bloomberg (Christian Vits): "Inflation in the German state of
Saxony held above 3 percent for a second month in December, driven by higher
oil and food costs. Prices rose 3.1% from a year earlier..."

December 26 - Bloomberg (Ben Sills and Todd White): "Producer-price inflation
in Spain accelerated for a third month in November as higher oil costs squeezed
manufacturers. The price of goods leaving Spain's factories, farms and mines
rose 5.4% from the year earlier..."

December 28 - Bloomberg (Aleksandra Nenadovic): "Serbian central bank Governor
Radovan Jelasic said inflation is accelerating because of record oil prices
and the government's failure to limit wages and cut costs at state companies.
The inflation rate will be 'about' 10% this year..."

December 26 - Bloomberg (Henry Meyer): "The Russian government will submit
amendments to the federal budget to keep its promise of boosting wages, Prime
Minister Viktor Zubkov told newly elected lawmakers. 'I especially underline
the importance of passing amendments to the budget to increase the wages of
government employees and military personnel,' Zubkov said... 'We should strictly
fulfill all our promises to citizens,' he told the Duma's opening session...
Higher-than-anticipated inflation this year made it necessary to budget extra
funds for salaries, Zubkov said."

December 27 - Bloomberg (Steve Bryant): "Turkey's central bank said it's closely
watching food and energy prices for signs they could upset the slowdown in
inflation the bank forecasts. The government plans to boost household electricity
prices by 15% in early 2008... A summer drought pushed up grocery prices and
helped accelerate inflation to 8.4% in November."

Bubble Economy Watch:

December 27 - The Wall Street Journal (James R. Hagerty and Kelly Evans): "A
closely watched gauge of U.S. home prices shows they are falling sharply across
most of the nation, as a deepening slump in the housing market threatens to
damp consumer spending. Home prices in 10 major metropolitan areas in October
were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price
indexes... That exceeded the previous record year-to-year decline of 6.3% in
April 1991... New statistics from the Census Bureau...indicate a slowdown in
the number of Americans moving to states that led the housing boom Nevada,
Florida and Arizona."

December 28 - Bloomberg (Bob Willis): "Sales of new homes in the U.S. fell
to a 12-year low in November, pointing to bigger declines in construction that
will hobble economic growth throughout 2008. Purchases dropped 9% to an annual
pace of 647,000 and October sales were revised down to a 711,000 rate... The
deepest housing recession in 16 years will worsen as discounts fail to lure
buyers and mounting foreclosures swell the glut of unsold properties."

December 25 - Associated Press: "Americans are falling behind on their credit
card payments at an alarming rate, sending delinquencies and defaults surging
by double-digit percentages in the last year and prompting warnings of worse
to come... Experts say these signs of the deterioration of finances of many
households are partly a byproduct of the sub-prime mortgage crisis and could
spell more trouble ahead for an already sputtering economy... The value of
credit card accounts at least 30 days late jumped 26% to $17.3 billion in October
from a year earlier at 17 large credit card trusts... At the same time, defaults...
rose 18% to almost $961 million in October... Some of the nation's biggest
lenders -- including Advanta, GE Money Bank and HSBC -- reported increases
of 50% or more in the value of accounts that were at least 90 days delinquent
when compared with the same period a year ago."

December 27 - Dow Jones (Chia-Peck Wong): "U.S. retail foot traffic for the
week ended Dec. 22 fell 'a significant' 10.6%, contributing to a sales drop
of 2.2% during the same period, according to ShopperTrak... which gauges mall
traffic. Total U.S. foot traffic for the month of December through Christmas
Eve declined 4.36%, while total holiday season foot traffic... was expected
to decline 2.5%..."

December 28 - The Wall Street Journal (Kelly Evans): "Business demand for
big-ticket goods has softened in recent months, a sign that stress from the
housing and credit markets is damaging other sectors of the slowing U.S. economy.
New orders for durable goods...rose just 0.1% in November from the previous
month after falling three months in a row... Shipments of Manufactured goods
dropped, and inventories rose, offering evidence of faltering demand... Orders
for nondefense capital goods excluding aircraft, a gauge of business investment,
dropped 0.4% after falling 2.9% in October. So far this year, orders are 1.8%
below last year's level. 'This evidence reinforces the likelihood that the
economy will slow dramatically in the fourth quarter,' Nigel Gault, U.S. economist
at forecaster Global Insight..."

Latin America Watch:

December 26 - Bloomberg (Telma Marotto and Andre Soliani): "Brazilian bank
lending rose 3.1% in November from a month earlier as record low interest rates
and higher employment encouraged consumers to borrow more. State and non-state
bank loans increased to 908.8bn reais ($509.3bn)... Lending climbed 26.7% from
November '06"

December 28 - Bloomberg (Carlos Barletta and Lester Pimentel): "The Costa
Rican central bank's 23-year hold on the country's currency may be coming to
an end as surging inflation puts pressure on the government to abandon its
policy of fixing the colon's exchange rate. Higher oil prices have pushed up
annual inflation to 10%, the highest in Central America, and forced the central
bank to allow the colon to gain against the dollar for the first time since
1984."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

December 27 - Market News International (Theodore Kim): "The deterioration
in the performance of non-Agency Residential Mortgage Backed Securities started
initially in subprime and, at least in terms of market volatility and spread
widening, spilled quickly over into most other structured credit products.
While the jury still may be out on whether the credit quality of commercial
real estate or consumer credit card collateral backing ABS is turning for the
worse, according to Standard and Poor's, many Alt-A mortgage deals are already
showing signs that they may be the next domino to fall. Alt-A severe delinquencies...have
been increasing in recent months. The rate of delinquencies for 2006 originated
deals is now running at more than double those of the 2005 vintage and more
than four times those of 2004 and 2003. By far the worst vintage may be 2007."

December 28 - The Wall Street Journal (Karen Richardson): "Warren Buffett,
seizing a chance to profit from turmoil in the nation's credit markets, is
starting up a bond insurer that aims to make it cheaper for local governments
to borrow and promises to be a tough competitor for the industry's embattled
incumbents. The billionaire investor's Berkshire Hathaway Assurance Corp.,
set to open for business today in New York state, will guarantee the bonds
that cities, counties and states use to finance sewer systems, schools, hospitals
and other public projects."

Mortgage Finance Bust Watch:

December 26 - The Wall Street Journal (Kemba J. Dunham and Jennifer S. Forsyth): "The
credit crunch triggered by the downturn in the housing market is creating problems
in commercial real estate, driving down prices of office buildings, shopping
malls and apartment complexes, and leaving some owners scrambling for cash.
One victim is Centro Properties Group, the fifth-largest owner of shopping
centers in the U.S. The Australian real-estate company saw its share price
fall by 90% in two days last week as it struggled to refinance short-term debt
it took on to fund its $6.2 billion acquisition of New Plan Excel, one of the
biggest owners of strip malls in the U.S. Centro had planned to pay off the
short-term loans by selling long-term debt via the commercial mortgage-backed
securities market, but the lack of buyers forced it to get a two-month extension
from its creditors."

Real Estate Bubbles Watch:

December 26 - Bloomberg (James Kraus): "U.S. commercial real estate sales
have halved in the past few months, driving down prices and leaving banks with
$65 billion of loans they can't sell to investors, the Wall Street Journal
reported. Sales of major U.S. office properties fell 55% to $7 billion in November
from a year earlier, the Journal said today, citing Real Capital Analytics."

December 23 - Bloomberg (Sebastian Boyd): "Property funds may seek to sell
a record 43 billion euros ($62 billion) of European commercial real estate
in the next three years, the Sunday Telegraph said, citing a report by an industry
group. U.K. fund managers may struggle to persuade investors to agree to extend
the life of funds as they mature, according to the report from the European
Association for Investors..."

Financial Sphere Bubble Watch:

December 28 - Bloomberg (Alison Vekshin): "U.S. bank revenue from trading
derivatives and other contracts fell 62% in the third quarter, driven by the
recent tightening of credit markets... The lost derivatives revenue will affect
five U.S. commercial banks the most, the [OCC] said. JPMorgan Chase & Co.,
Bank of America Corp., Citigroup Inc., Wachovia Corp. and HSBC Bank USA accounted
for 97% of the industry's total derivatives trading revenue, according to the
report."

December 28 - OCC's Quarterly Report on Bank Derivatives Activities: "Insured
U.S. commercial banks generated $2.3 billion in trading revenues during the
third quarter of 2007, down 48% from a year earlier... 'The third quarter trading
numbers reflect the effects of the recent turmoil in the credit markets,' said
Kathryn E. Dick, Deputy Comptroller for Credit and Market Risk. 'Credit trading
books were adversely impacted by rising credit spreads, poor liquidity, and
ineffective hedging during the quarter.' The OCC reported that revenues from
credit intermediation declined $3.5 billion to a loss of $2.7 billion. Revenues
from interest rate contracts increased $102 million to a record $3.1 billion,
and revenues from foreign exchange transactions increased 59% to $2.0 billion.
'Strong client demand for both interest rate and foreign exchange products
boosted revenues in these sectors and helped to soften the impact of the poor
performance of credit products,' Ms. Dick said. The OCC also reported that
the notional amount of derivatives held by insured U.S. commercial banks increased
$19.7 trillion in the quarter to a record $172 trillion. The third quarter
derivatives total is 36% higher than in the same period in 2006. Credit derivatives,
the fastest growing product in the derivatives market, increased 19% during
the quarter to a notional level of $14.0 trillion, 77% higher than a year ago.
The OCC reported that the net current credit exposure, the primary metric the
OCC uses to measure credit risk in derivatives activities, rose $53 billion
during the quarter to $252 billion."

California Watch:

December 28 - Los Angeles Times (Christopher Thornberg): "In 2002, the median
price of a single-family home in Los Angeles was $270,000 and the median homeowner's
income was $65,000. With a $50,000 down payment, the annual cost of that house
(taxes, insurance and payment on a 30-year fixed-rate conventional mortgage)
would add up to about 33% of the median household's income -- just under the
35% mark that the Federal Housing Administration calls the upper limit of 'affordable.'
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled
speculation fueled by unparalleled access to mortgage capital. But median income
rose a paltry 15%. So today that same set of costs come to 60% of gross income.
That might be a manageable burden when home prices are rising at double-digit
rates, creating new equity that can be accessed to support spending -- but
not when prices are flat and the home-equity ATM is closed... The cold, hard
truth is that foreclosures are serving only to hasten the painful process of
shifting housing prices back to a level the market can sustain. Prices must
and will fall. Everywhere. Probably 25% to 30% from their peak. 2008 is the
year when gravity will reassert itself."

Speculator Watch:

December 28 - Bloomberg (Katherine Burton): "Drake Management LLC suspended
most redemptions from its largest hedge fund after losing 23.7% through November,
according to a letter sent to investors... Drake will meet about 25% of requested
withdrawals from its $3 billion Global Opportunities Fund... The partial redemptions
were made possible by an agreement with Drake's banks, the letter said. The
firm's lenders would have been allowed to terminate transactions and seize
collateral if net assets had fallen by 30%."

There's still Monday's trading session to officially end the year. I thought
I would get my 2007 Wrap-Up out of the way a little prematurely. This will
be a work-in-progress, as I plan on editing and amending as year-end data come
available.

The year was remarkable for the unusual divergences between bursting Bubbles
and others continuing to inflate. This was the case both domestically and globally.
As an example, the U.S. KBW Bank index sank 24.8%, while the NASDAQ100 surged
19.9%. The AMEX oil index surged 32.8%, while the S&P500 Homebuilding index
collapsed 60%. Globally, major Chinese stock indices about doubled in price,
while Japan's Nikkei 225 fell 11%. In Europe, Britain's FTSE mustered a 4.1%
gain, while Germany's DAX posted a 22.3% rise.

While December numbers have yet to be reported, better than 25% year-over-year
growth pushed International Reserve (central bank) Assets to $6.06 TN. Through
September, China's reserves were up 45% y-o-y to $949bn. Russian reserves were
up 56% this year to $466bn, with India's reserves increasing 56% to $264bn.
Brazil's reserve assets almost doubled to $162bn. OPEC reserves were up 36%
y-o-y to $421bn. "Sovereign Wealth Fund" was added to financial market vernacular.
The dollar drifted further away from reserve currency status.

Despite the significant fourth quarter U.S. slowdown, 2007 will post only
a modest decline from last year's record total global debt issuance. The global
IPO market enjoyed a record year approaching $275bn, up from the previous record
$242bn set last year. Although second-half deal flow slowed sharply, global
M&A activity was still 20% ahead of 2006 (according to Dealogic), led by
Asia and the emerging markets.

Gold gained 31.8%, its largest annual gain since the tumultuous year 1979
(when its price doubled) and its seventh straight year of positive returns.
Crude oil surged 59%. Heating oil gained 62%, gasoline 54% and natural gas
17%. Despite declining 10% from its recent high, Wheat prices inflated 77%
this year. Soybeans prices rose a record 79% this year to the highest level
since 1973. After gaining 80% last year, corn climbed another 16% in 2007.
Cotton prices rose 20%. The CRB index inflated 16.5% this year, and the more
energy-weighted Goldman Sachs Commodities index surged 40.6%. It was the year
when the markets came to recognize that significantly higher energy and commodities
prices were having only minimal impact on demand.

During the year 2007, it became clear that the Federal Reserve had lost control
of inflationary forces. The year ended with Import Prices up 11.4% y-o-y; the
Producer Price index up 7.2% y-o-y; and the Consumer Price index up 4.3% y-o-y.
Despite a weakened economy and another year of dollar devaluation (and booming
exports!), the U.S. Current Account Deficit remained in the neighborhood of
$800bn. Coupled with huge speculative outflows seeking profits from global
inflation, the world was absolutely inundated with dollar liquidity.

It was, as well, a year of shattered myths: That astute global central bankers
have inflation in check; that contemporary finance effectively disburses risk
to the marketplace, in the process shielding the banking system from Credit
and market risk; that "AAA" stands for safety and liquidity; that nationwide
home prices won't decline; that the Federal Reserve controls marketplace liquidity;
that commercial paper is safe; that CDOs make sense; that the financial guarantors
face minimal risk. Indeed, the entire bullish notion of contemporary risk modeling,
structuring, hedging, and financial guarantees ("Credit insurance") is now
in serious jeopardy.

2007 saw the initial bursting of the Great U.S. Credit Bubble. To be sure,
the enormous Bubble in Wall Street-backed finance abruptly went from runaway
boom to astounding bust. Much of the mortgage origination market collapsed
spectacularly. Thirty percent annualized broker/dealer balance sheet growth
came to an abrupt halt during this year's second half. Booming "private-label" MBS
issuance ground to an immediate halt. Mortgage Credit Availability was reduced
radically, especially in subprime, "jumbos" and riskier loan categories. The
booming asset-backed securities and CDO markets faltered badly. The banking
system's off-balance sheet structured "vehicles" collapsed in illiquidity,
another factor forcing the major lending institutions to balloon their balance
sheets. The global inter-bank lending market seized up. The hedge fund industry
waited anxiously for redemption notices. Counter-party risk became a very serious
systemic issue, as did speculative leveraging. The global financial system
ends the year on the precipice.

Meantime, U.S. Bank Credit expanded almost 12% during the year, with Commercial & Industrial
loans ballooning almost 21%. With Risk Embracement turning to Risk Aversion,
the marketplace called upon the Money Fund Complex to Intermediate Risk. Money
Fund assets expanded an unprecedented $729bn, or 30.6%. And as liquidity disappeared
for Wall Street-backed mortgages, Fannie and Freddie's Combined Books of Business
inflated an unprecedented $600bn (or so). The Federal Home Loan Banking system
ballooned its balance sheet by more than $200bn, in the process becoming Lender
of Last resort to some very troubled financial institutions. Global central
bankers engaged in unparalleled concerted marketplace interventions and liquidity
injections, sustaining global Bubbles in the process.

From the Fed's Q3 "flow of funds," total (non-financial and financial) U.S.
system Credit growth expanded at an annualized $4.99 TN, sustaining the U.S.
Bubble Economy but in an Unsustainable Manner - unsustainable in the quantity
and structure of Credit and Risk Intermediation, as well as with the nature
of economic (Bubble) activity. Financial sector debt expanded at an alarming
15.6% annualized pace, with Bank Credit, GSE, agency MBS, and Money Funds all
expanding at double-digit rates. Of late, the Wall Street Credit crunch and
severe tightening in risky debt markets have instigated recessionary forces.
Many housing markets have gone from bad to worse - on the way to much worse.
Florida is a mess, while California is an unfolding disaster. Some analysts
have begun to recognize that U.S. asset and debt markets have not faced such
precarious dynamics since The Great Depression. Meanwhile, collapsing U.S.
and international interest-rates fuel myriad global Bubbles and inflationary
pressures. In short, 2007 has been a continuation of the unfolding "worst-case-scenario."